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In recent years, the health care system has accelerated experimentation into new payment and delivery models that reward care coordination, integration, and value. However, observers and market participants have expressed concerns that long-standing anti-fraud rules in Medicare and Medicaid prevent innovation and hold back potentially promising new arrangements. In 2018, the Trump administration sought stakeholder feedback on how the regulations implementing those laws might be modified to promote value-based, coordinated, integrated care delivery while protecting taxpayers and beneficiaries from fraud.

On January 30, 2019 the USC-Brookings Schaeffer Initiative for Health Policy will host Eric Hargan, the Deputy Secretary of Health and Human Services, for a discussion about this effort. Following his presentation, experts in health care payment and delivery system reform will discuss the issue and the path forward.

In 2018, Virginia became the 33rd state to approve Medicaid expansion under the ACA. This decision came just as the Commonwealth braced to mark the one-year anniversary of violent Neo-Nazi attacks in Charlottesville that claimed three lives and reminded the nation that racism and xenophobia are alive and well in America. The juxtaposition of these two events reminds us that health care providers – specifically hospitals – could act to significantly reduce the adverse health impacts of racial inequity that affect all populations.

Matthew outlines how hospitals could use the opportunity presented by Medicaid expansion to reduce inequitable population health outcomes and model a path forward toward broader racial equity. She also notes that hospitals can leverage their role as economic drivers in communities to equalize health and social outcomes for all. And she suggests the urgent need for innovative opioid crisis intervention presents a fertile proving ground for new ways that hospitals can act to reduce the impact of racial inequity.

The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. She is currently not an officer, director, or board member of any organization with an interest in this article.

In late October, the Trump Administration released a proposed rule that would permit employers to subsidize their employees’ purchase of individual market health insurance coverage via health reimbursement arrangements (HRAs). Under current law and regulations, employers are generally barred from subsidizing individual market coverage on behalf of their employees, whether using pre-tax or post-tax dollars, although small employers are eligible for a limited exception from this rule.

As Christen Linke Young, Jason Levitis, and I discuss in a recent analysis of the proposed rule, this change would have wide ranging effects. Notably, many large employers with sicker workforces would find it attractive to subsidize individual market coverage via an HRA.1 Today, these employers’ only options for providing coverage to their workers are to purchase experienced-rated coverage on the large group market or to self-insure. Thus, access to community-rated individual market products could allow these employers to provide coverage at considerably lower cost. However, the resulting changes in coverage arrangements would likely increase individual market premiums and the federal deficit.

While the Administration’s proposal in its current form would mostly result in the type of firm-level shifting described above, employers would also have an incentive to selectively shift their sicker workers into the individual market while arranging to cover their healthier workers in some other way.2 The proposed rule includes several provisions designed to prevent this behavior: it bars employers from offering this type of HRA side-by-side with a traditional health plan; it requires employers to offer this type of HRA on the same terms to all similarly situated employees; and it bars employers from using this type of HRA to subsidize short-term, limited duration coverage. While these safeguards would likely be largely effective (although they can and should be strengthened), the proposed rule solicits comments on eliminating or weakening them.

This analysis examines how eliminating one or more of these safeguards would affect individual market premiums. I estimate that, absent these safeguards, the Administration’s HRA proposal would cause very large increases in individual market premiums, although the precise magnitude of those increases is uncertain. In a conservative scenario in which only 10 percent of employers elected to use HRAs to shift sicker workers into the individual market, individual market premiums would rise by 16 percent or more. If all employers took this approach, individual market premiums would almost double. These effects are so large because the group market is so much larger than the individual market, which means that even moderate amounts of worker-level shifting can substantially alter the individual market’s risk mix.

The remainder of this analysis proceeds as follows. I first briefly summarize the Administration’s proposal and its main effects, drawing heavily on the analysis co-authored with my Brookings colleagues referenced above. I then examine the consequences of relaxing or eliminating the safeguards against worker-level shifting that were included in the proposed rule and present quantitative estimates of the effects of a version of the Administration’s HRA proposal that lacked one or more of these safeguards.

Overview of the Proposed Rule

An HRA is a mechanism by which an employer can pay for certain health care expenses incurred by its employees on a pre-tax basis. Currently, employers are generally prohibited from subsidizing an employee’s purchase of individual market coverage, whether through an HRA or other mechanisms. (In 2016, Congress created a limited exception to this rule for employers with fewer than 50 full-time-equivalent employees.) The proposed rule would permit HRAs that can be used to pay premiums for individual market coverage under certain conditions discussed below.3

Under the proposed rule, this new option would likely appeal primarily to large employers with sicker workforces. When offering a traditional health plan, large employers must either self-insure or purchase coverage in the large group market, where premiums are typically experience-rated; either way, the cost of providing coverage reflects the health status of their employees. By contrast, individual market premiums are community-rated, meaning they do not vary by health status. Offering an HRA that can be used to purchase individual market coverage could therefore allow employers with sicker workforces to offer similar coverage at much lower cost. (The small group market, like the individual market, is community-rated, so the proposed rule would create no such benefits for small employers.)

These incentives would likely drive large employers with sicker workforces to make two types of changes. First, some employers would drop their traditional health plans and instead subsidize the purchase of individual market coverage via an HRA; this type of shifting would generally worsen the individual market risk pool. Second, some employers that do not currently offer health benefits might be induced to begin offering an HRA; this type of shifting could benefit the individual market risk pool to the extent that these employers’ sicker workers are already enrolled in the individual market. On net, as my colleagues and I discuss in detail, it appears likely that these shifts would increase individual market premiums and federal costs, although it is possible that overall insurance coverage would increase as well.

Safeguards Against Worker-Level Shifting of Sicker Workers into the Individual Market

While the Administration’s proposal as currently constructed would primarily drive the type of firm-level shifting described above, employers—including those with healthier workforces—would also have an incentive to engage in worker-level shifting: providing their sicker workers with individual market coverage via an HRA while arranging to cover their healthier workers under either a traditional health plan (in the case of large employers) or short-term, limited-duration coverage.4 Because the individual market is community-rated, while these other coverage options are not, this approach could allow employers to obtain coverage for their sicker workers at far lower cost without increasing the cost of covering their healthier workers, thereby reducing their overall cost of delivering health benefits. However, this type of health-status-based sorting would lead to substantial increases in individual market premiums, particularly given the large size of the group market relative to the individual market.

At a high level, employers could seek to achieve this sorting in two main ways. First, they could selectively offer individual market coverage to their sicker employees. Second, they could offer workers a choice between individual market coverage and other coverage, but structure that choice so as to encourage sicker workers to choose individual market coverage and healthier workers to choose the other coverage.

The Administration’s proposal includes three main provisions designed to prevent employers from selectively shifting sicker workers into the individual market. Specifically, the proposed rule: bars employers from offering the same worker a choice between this type of HRA and a traditional health plan; requires employers offering this type of HRA to offer it on the same terms to all similarly situated employees; and bars this type of HRA from being used to subsidize short-term, limited duration coverage.

These safeguards would likely be fairly effective in preventing worker-level shifting of sicker workers into the individual market, although my colleagues and I have several recommendations for how they could be strengthened. However, the proposed rule solicits comment on removing these safeguards. Removing any of these safeguards would likely cause a large influx of workers into the individual market, but the precise mechanism by which this would occur would depend on which were eliminated:

Allowing an HRA to be offered side-by-side with a traditional health plan: Offering workers a choice between individual market coverage subsidized via an HRA and a traditional health plan could facilitate sorting by health status. In this scenario, the employer could design its traditional health plan to be unappealing to its sicker workers, thereby encouraging those workers to decline it in favor of individual market coverage. Large employers have substantial flexibility in designing traditional health plans, so they could make these plans unappealing to sicker workers in a number of ways. They could, for example, require high cost sharing for services associated with certain high-cost chronic conditions. Another strategy would be to offer a traditional health plan that imposes high overall cost-sharing requirements, but low cost-sharing for routine care commonly used by relatively healthy workers. Employers could also selectively promote the HRA to sicker workers or otherwise encourage sicker enrollees to select the HRA option.

Eliminating the requirement to offer an HRA on the same terms to all “similarly situated” employees: Employers could also selectively shift sicker workers into the individual market by only offering this type of HRA to sicker workers. Even under the proposed rule, employers would have some ability to target HRAs to sicker workers due to the large number of factors employers can use in defining what groups of workers are considered “similarly situated,” as my colleagues and I have discussed. If the list of factors was expanded, this would allow even finer-grained targeting. If these requirements were removed entirely, nearly complete sorting would likely be possible.

Allowing subsidization of short-term coverage via the same HRA: If the same HRA could be used to subsidize either individual market coverage or short-term coverage, then workers’ own financial incentives would lead them to sort themselves across the two types of coverage by health status. Because short-term coverage is underwritten, sicker workers would either face high premiums or be completely unable to obtain it, so they would generally opt for individual market coverage. By contrast, healthier workers would typically be able to purchase lower-cost coverage in the short-term market and so would generally obtain their coverage there.

Methodology for Simulating the HRA Proposal Without Safeguards Against Worker-Level Shifting

I now turn to simulating the effects of a version of the Administration’s HRA proposal that lacked one or more of these safeguards against worker-level shifting. This section provides an overview of my methodology; the methodological appendix provides the full technical details. The overall effects of this version of the HRA policy would depend on two main factors: (1) how many and what types of workers end up enrolled in individual market coverage at firms that seek to use HRAs to steer their sicker workers into the individual market; and (2) how many firms elect to use HRAs in this way. I consider each in turn.

Focusing first on worker-level enrollment patterns at firms that seek to use HRAs to shift sicker workers into the individual market, I assume that a worker would end up enrolled in individual market coverage if that coverage was less expensive than (equivalent) coverage priced based on that worker’s own expected claims risk. Equivalently, I assume that people who are sicker than the individual market average (adjusting for age rating) end up enrolled in individual market coverage, while those who are healthier than the individual market average (adjusting for age rating) end up enrolled in other coverage. As discussed above, if the new type of HRA could be used to subsidize short-term coverage in addition to individual market coverage, then workers’ own choices would bring about this sorting. In policy scenarios where this type of HRA could be offered side-by-side with a traditional health plan or the requirement to offer HRAs on the same terms to all similarly situated employees were eliminated, employers would seek to bring about this sorting through their decisions about how to structure their traditional health plans or whom to offer HRAs.

In the real world, the sorting of enrollees between individual market and other coverage might be less precise than implied by this assumption because enrollment decisions might depend on factors that are not included in this simple decision rule. For example, in the policy scenario where this type of HRA could be used to purchase short-term coverage, some relatively healthy people might opt for individual market coverage even when short-term coverage would be less expensive because they wished to avoid the hassle costs associated with the underwriting process. Alternatively, some relatively sick enrollees might opt for short-term coverage (if it were available to them) despite being charged a relatively high premium because they want coverage with a broad network of providers and such coverage is unavailable in the individual market. As a crude way of capturing these and many other possible types of frictions, I report results from simulations in which the price of individual market coverage is perceived to be 25 percent higher than it actually is for the purposes of enrollment decisions, as well as simulations in which the price of individual market coverage is perceived to be 25 percent lower.

Turning to employers’ decisions, there is meaningful uncertainty regarding what share of employers would set up HRAs with the objective of shifting their sicker workers into the individual market. While the potential reduction in health benefit costs would give employers a powerful incentive to adopt this strategy, employers might reasonably fear that changing or eliminating their traditional health plans would make it harder to attract and retain workers. Indeed, depending on the precise policy scenario under consideration, setting up HRAs to achieve this type of sorting could create additional hassle costs for enrollees. Workers who are shifted into the individual market might also be displeased with the narrower networks typical of individual market products. Exactly how employers would balance these competing considerations is uncertain, so I consider scenarios in which employers accounting for 10 percent, 50 percent, or 100 percent of current enrollment in large employer coverage adopt this strategy.5 (I assume that no small employers engage in worker-level shifting, although it is likely some would in the scenario where this type of HRA could be used to purchase short-term coverage.)

To empirically implement the model sketched above, I require detailed data on the characteristics of those currently enrolled in large employer coverage. I construct a suitable sample by pooling several years of data from the Medical Expenditure Panel Survey, Household Component (MEPS-HC). In that sample, I construct a preliminary estimate of each person’s expected claims risk in the coming year based on their health care spending in the prior year, their age, and their self-reported health status. The MEPS-HC is known to understate the number of people with very high health care spending, so these estimates likely understate the number of people with very high expected health care spending. To address this problem, I adjust the preliminary estimates using estimates of variation in expected claims risk reported by Fleitas, Gowrisankaran, and Lo Sasso based on a large health care claims database.

I use an iterative method to solve for equilibrium enrollment decisions and individual market premiums. In brief, starting from current individual market premiums, I estimate the number and type of enrollees in employer coverage who would shift into the individual market. I then recompute individual market premiums based on the new enrollee pool and re-calculate which enrollees would shift into the individual market. I repeat these calculations until the resulting premium is consistent with the enrollment decisions leading to that premium. These premiums and enrollment patterns are the new equilibrium.

I note that there are at least two ways in which my approach may understate the effect of the HRA policy on individual market premiums. First, I do not model firm-level shifting into the individual market. In scenarios in which only a minority of employers engage in worker-level shifting, it is likely that some firms with sicker workforces (other than those engaged in worker-level shifting) would elect to move all of their workers into the individual market. This would likely cause individual market premiums to rise by more than I estimate here. Second, my modeling does not account for the likelihood that higher premiums would reduce enrollment among unsubsidized enrollees purchasing individual market coverage. Since those dropping individual market coverage would likely be healthier, on average, than those who remain, this too would cause individual market premiums to rise by more than I estimate here.

Simulation Results

Table 1 reports the estimated change in individual market premiums from implementing a version of the HRA proposal that lacked one or more of the safeguards against worker-level shifting included in the proposed rule. Across all of the scenarios examined, individual market premiums would increase substantially. Unsurprisingly, the amount individual market premiums would rise depends on how many employers set up HRAs designed to shift sicker workers into the individual market. If only 10 percent of employers set up such HRAs, then individual market premiums would rise by 16-17 percent, depending the set of assumptions used. By contrast, if nearly all large employers sought to use HRAs in this way, individual market premiums would almost double under all of assumptions examined.

Perhaps more surprising, the estimates in Table 1 show that allowing factors other than expected claims risk to influence how workers sort between the individual market and other coverage has only a modest effect of the results. There are two reasons for this. First, changes in the perceived attractiveness of individual market coverage change enrollment decisions for relatively few people. This is because average claims risk in the individual market is quite high after implementation of the HRA policy, so the level of expected claims risk where a worker (or the worker’s employer) is indifferent between individual market coverage and other coverage is well out in the tail of the distribution, where the distribution is relatively thin. Second, essentially by definition, enrollees on the margin between individual market coverage and other coverage have expected claims risk similar to the (post-policy) individual market average, so whether these enrollees are in the individual market has little effect on market average claims risk.

Table 2 shows that only a relatively small fraction of workers associated with employers engaging in worker-level shifting via an HRA would end up with individual market coverage. These shifts would nevertheless have a large effect on premiums because the employer market is very large and because those who do shift into the individual market would have very high expected claims costs. Indeed, much of the effect on individual market premiums would occur even if the number of workers shifting into the individual market was substantially smaller than shown in these simulations, provided that the very costliest enrollees at these employers did shift into the individual market.

Finally, Table 3 quantifies the savings employers could realize by engaging in worker-level shifting. Specifically, the table reports the change in the effective price of insurance coverage experienced by employers engaged in worker-level shifting. For these purposes, I define the change in the effective price as the percent difference between the cost of the coverage its workers would obtain under the worker-level shifting strategy (whether in the individual market or elsewhere) and the cost of delivering equivalent coverage through a traditional health plan.6

If relatively few employers engage in worker-level shifting, then this effective price would fall by 21-23 percent, depending on the precise assumptions used. This effective price would fall by less if more employers engaged in worker-level shifting, reflecting the fact that individual market premiums would be higher. Even in these scenarios, however, engaging in worker-level shifting would reduce this effective price by 11-12 percent. The magnitude of these potential savings suggest that at least a substantial minority of firms would likely adopt this approach, despite the fact that this strategy would have some countervailing costs for employers, as discussed earlier.

Conclusion

Without the provisions of the proposed rule that aim to prevent employers from using HRAs to shift their sicker workers into the individual market, the Administration’s HRA proposal would lead to very large increases in individual market premiums, thereby increasing costs for individual market enrollees who are not eligible for subsidies and increasing the federal government’s costs of providing premium tax credits. Those costs would be difficult to justify; the main beneficiaries of the proposal would be large employers that already offer coverage, many of whom do not have particularly sick workforces, meaning that the proposal would be unlikely to produce substantial increases in insurance coverage or improvements in risk sharing. While the costs of the Administration’s HRA proposal likely outweigh its benefits even in its current form, these results imply that that if the Administration moves ahead, it should preserve—and strengthen—provisions intended to prevent selective shifting of sicker workers into the individual market.

What’s the latest in health policy research? The Essential Scan, produced by the USC-Brookings Schaeffer Initiative for Health Policy, aims to help keep you informed on the latest research and what it means for policymakers. If you’d like to receive the biweekly Essential Scan by email, you can sign up here.

While the goal of value-based pricing models is to better align incentives between payers and providers, implementing such models within the pharmaceutical space has proven challenging. First and foremost, though new drug prices are based on clinical trial outcomes, manufacturers and payers often disagree about the value of the drug over the long run in a real world setting. A new NEJM catalyst article outlines a different approach: a tiered pricing system that allows prices to vary over fixed time intervals as data on the drug’s real world efficacy is gathered. The authors propose a low initial price during an evaluation phase, followed by a higher or lower price that depends upon the drug’s real-world performance. The price would prevail during a fixed reward phase before being reduced to facilitate access uptake during an access phase. Using PCSK9 inhibitors as an example, the authors modeled scenarios where the drug had low, expected and high efficacy and showed that in all three scenarios, manufactures, patients, and payers are all better off compared to the status quo where launch prices are set high and remain there until patent expiry. The authors acknowledge a number of obstacles would need to be worked out before such a model could be implemented, including establishing long-term agreements between payers, manufactures, and PBMs and the effect such an agreement may have on future product competition. Full article here.

One important driver of elevated healthcare spending in the United States is the over-provision of low-value health care (LVHC) services. Prior studies of LVHC service provision have thus far been unable to measure the variation in LVHC provision at the physician-level. However, a new study using Medicare enrollment and claims data from 2008 to 2013 finds that primary care physicians at the 90th percentile of LVHC provision for their provider organization provide 60 percent more LVHC services than physicians at the 10th percentile at the same provider organization. Furthermore, the authors found that only 1.4 percent of physician variation within organizations could be explained by observable physician characteristics (e.g. age, sex, and training) and that LVHC services were very common even among the least wasteful physicians. These findings suggest that provider organizations could benefit greatly from directly measuring their physicians’ provision of LVHC services in order to support efforts to incentivize more cost-effective practices such as targeting wasteful physicians for retraining and making inclusion in networks and risk contracts dependent on maintaining low levels of LVHC service provision. Full study here.

Medicaid expansion under the Affordable Card Act may be associated with reduced mortality, but evidence is limited, especially for high-risk groups. Patients with end-stage renal disease (ESRD) are a particularly vulnerable group. For these patients, Medicare provides coverage for patients requiring dialysis, but only after three months of dialysis treatment. During those initial months of dialysis, up to one in five nonelderly patients lacked insurance coverage prior to Medicaid expansion. A new study examines the association of Medicaid expansion with 1-year mortality among nonelderly patients with ESRD initiating dialysis, as well as insurance coverage and predialysis nephrology care. The researchers compared 142,724 patients in expansion states with 93,522 patients in non-expansion states, finding that Medicaid expansion was associated with a significant decline in 1-year mortality rates. In expansion states 1-year mortality rates declined from 6.9 to 6.1 percent post-expansion, while mortality rates dropped from 7.0 to 6.8 percent for non-expansion states. Medicaid expansion was associated with a 10.5 percentage point increase in Medicaid coverage at dialysis initiation, as well as a -4.2 percentage point decrease in being uninsured. There were no significant changes in predialysis nephrology care. These results suggest that spreading Medicaid expansion to states that have not yet adopted it will be beneficial for mortality outcomes among ESRD patients. Full study here.

Studies of the Affordable Care Act’s Medicaid expansion have thoroughly demonstrated the financially protective effect of Medicaid, but there is still little evidence that it has had a significant effect on health or mortality. A new paper estimates the effect of Medicaid prescription drug spending on mortality, using group and state-specific roll out of Medicaid drug coverage. The author finds that a $1 per resident increase in state Medicaid prescription drug expenditure leads to mortality from internal causes to drop by 2 deaths per hundred thousand, a decline of 0.23 percent. The cost per-death averted for the Medicaid drug program was estimated at $49,600, and the cost per life-year saved was $19,600, indicating that the program was a relatively cost-effective way to add life-years to the population. Overall, this paper shows a causal link between prescription drug coverage for the poor and mortality improvements, and suggests that the broader effects on health are much larger. Full study here.

Experts predict that care fragmentation—the division of the healthcare services individual patients receive across many providers —leads to poor care coordination, more utilization, higher costs, and uneven quality. Within Medicare, the effects of fragmentation on utilization, costs, and quality are particularly concerning, considering the median Medicare beneficiary is seen by eight distinct providers each year and 10 percent of patients are treated by over 21 providers. A new study uses patients in Medicare who have moved to a new region to examine whether regional differences in care fragmentation contribute to differences in costs and utilization patterns. The researchers find that roughly 60 percent of the variation in fragmentation across regions is due to the fragmentation of care in the area rather than patient demand. They find moving to a region with one standard deviation higher fragmentation increases care utilization by 10 percent. They found greater fragmentation led to more provider encounters, but fewer visits with primary care providers, and greater reliance on specialists, including specialists whose scope of practice overlaps with primary care provider’s scope of practice. Interestingly, patients increased their use of both high-value services (e.g. testing for diabetics, vaccines) and services associated with over-utilization (e.g. repeat imaging, emergency department visits). These findings suggest policies aiming to reduce care fragmentation should keep in mind the importance of regional clinical labor markets and local care styles. Full study here.

On October 29, 2018, the Departments of Labor, the Treasury, and Health and Human Services jointly published a proposed rule that would loosen the rules governing Health Reimbursement Arrangements (HRAs) and other account-based health benefits that employers offer to their employees. In “Evaluating the Administration’s Health Reimbursement Arrangement Proposal”, Christen Linke Young, Jason A. Levitis, and Matthew Fiedler describe the proposed rule and its likely effects on insurance markets, employers, workers, and Marketplaces.

The authors begin by addressing the proposed rule’s introduction of an “individual-market-integrated HRA,” which would allow employers to use pre-tax dollars to subsidize their employees’ purchase of health insurance in the individual market. They explain that this new option would likely be particularly appealing to large employers with sicker workforces. These employers’ cost of offering a traditional health plan reflects their workers’ above-average health care needs, so subsidizing community-rated individual market coverage could allow them to offer similar coverage at lower cost. Similarly, large employers of all varieties would have an incentive to shift just their sicker workers into the individual market; the departments do propose safeguards that would limit this type of worker-level shifting, but likely not eliminate it.

The authors further explain that while these shifts would generate savings that would be shared between employers and their workers, the influx of sicker workers into the individual market would increase premiums, thereby increasing subsidy costs for the federal government and premiums for unsubsidized enrollees. These changes in employer coverage arrangements would also create winners and losers within firms to the extent that firms do not make offsetting changes to their compensation structures, with younger and higher-income workers generally benefiting at the expense of older and lower-income workers. Furthermore, the authors argue that there is reason to doubt that the departments’ proposal is legally permissible.

The authors conclude that the negative effects of allowing firms to subsidize the purchase of individual market coverage, particularly the increase in individual market premiums and the attendant fiscal costs, are likely to outweigh the benefits to employers and their workers, and they recommend that the departments not finalize this proposal. If the departments nevertheless move ahead, they argue that it is imperative for the departments to limit employers’ ability to selectively move their sicker workers into the individual market, which could greatly magnify the negative effects of the proposed rule. The authors make specific suggestions to the departments about how to retain and strengthen the relevant features of the proposed rule.

The paper also considers the departments proposal to create a separate type of HRA that could be used to purchase short-term, limited-duration coverage. This proposal could allow employers to shift costs from their healthier workers onto their sicker workers and raises its own legal concerns, and the authors recommend that the departments decline to finalize this proposal. The authors also note that the proliferation of HRAs could also make it hard for consumers to understand their options and comply with the various sets of rules, while imposing new administrative burdens on the Marketplaces. As such, they recommend that the departments require that employers provide all workers offered an HRAs a clear notice describing what they are offered, and that the departments provide additional time for understanding and implementing the proposed policy changes.

Jason Levitis is a Nonresident Senior Fellow at Yale Law School’s Solomon Center for Health Law and Policy. He is also a principal at Levitis Strategies LLC, where he provides technical assistance and strategic advice on the ACA’s tax provisions, state innovation waivers, tax administration, and regulatory process to state officials nationwide through his work at Princeton University’s State Health and Value Strategies project.

Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.

What’s the latest in health policy research? The Essential Scan, produced by the USC-Brookings Schaeffer Initiative for Health Policy, aims to help keep you informed on the latest research and what it means for policymakers. If you’d like to receive the biweekly Essential Scan by email, you can sign up here.

Previous reports and anecdotal evidence have suggested that the administrators of long-term care hospitals (LTCHs) face financial incentives to keep patients hospitalized for longer than is medically necessary in order to collect a larger payment from the Medicare Prospective Payment System (PPS). A new study which uses Medicare claims data from 2004-2013 confirms this speculation, finding that LTCHs discharge 25.7 percent of patients in the three days immediately after the LTCH has secured a larger Medicare reimbursement (a threshold called the magic day by industry participants) while only 6.8 percent of patients are discharged in the three days before the larger reimbursement is secured. The authors of the study are able to show that this significant spike in discharges is a direct result of strategic decisions made by LTCHs by showing that their findings are consistent across Diagnostic Related Groups and by showing that this behavior did not occur before the current payment rules were implemented. Finally, the authors develop a dynamic structural model of LTCHs discharge decisions to evaluate a 2014 recommendation by MedPAC to address this behavior and find that it would save about $500 million per year for the nine biggest DRGs alone and would lead LTCHs to release patients a week earlier on average. Full study here.

Discharge Patterns for DRG 207 by LTCH Profit Type, FY 2004-2013

The ACA was enacted with the goal of expanding access to affordable health insurance for millions of Americans. However, many feared that increasing the number of people eligible for public health insurance might reduce the number of hours workers chose to work. New research from the Urban Institute seeks to determine whether coverage gains from 2010 to 2016 were associated with changes in labor market outcomes across occupations. The researchers estimate that about 10.6 million workers were added to the workforce between 2010 and 2016, and nearly all occupations gained workers during this time. They find that occupations that experienced greater coverage gains under the ACA were not more likely to experience adverse labor market consequences. The study also found that larger coverage gains under the ACA were not associated with lower real earnings or hours worked—across all occupations. Despite many predictions that employment and work hours would be reduced, the ACA seems to not have negatively affected either. Full study here.

Telemedicine-enabled virtual visits have been promoted as a tool to increase access to specialty care and lower costs. New research looks at data from over 35,000 patients in a Massachusetts-based ACO, comparing patients who registered with the virtual visit program and used it to those who registered but did not use the program. The researchers found that virtual visits reduced in-person visits by 33 percent, but increased total visits (virtual plus in-person) by 80 percent over one and a half years. They estimate that at the population level for every 3.5 virtual visits, one in-person visit was averted. However, after one year the rate of in-person care among users of the virtual visit program returned to baseline levels and the use of virtual visits declined. If virtual visit programs are intended to be a tool in accessing specialty care, this study suggests they will need to find ways to extend their benefits past the one-year mark. Full study here.

A number of recently introduced programs and reforms have aimed to create cost control incentives through disrupting the traditional fee-for-service paradigm. In Health Maintenance Organizations (HMOs), the HMO is paid a fixed amount per enrollee, regardless of care used. HMOs have been found to have lower spending levels compared to other plans, but it is unclear whether the high price sensitivity seen in HMOs is the result of provider price sensitivity or price sensitive patients selecting into these plans. A new study aims to look at patient and provider price sensitivity in HMOs through analyzing demand for statins. According to the study, spending on statins was 19 percent lower (a difference of about $95) in HMOs compared to other insurance plans. The researcher finds evidence that HMO patients are nearly twice as sensitive to their drug’s copay as non-HMO patients. In addition, HMO physicians were found to be highly sensitive to drug placement on the formulary and drug procurement costs, which together accounted for 20 to 55 percent of the spending difference compared to other insurance plans. Because there are many generic and branded options for reducing cholesterol, the generalizability of these findings may be limited, but better understanding the mechanisms through which HMOs achieve cost savings continues to be important as alternative payment models are considered. Full study here.

A growing body of evidence shows that areas in the United States with robust primary care systems tend to have better outcomes and lower per capita costs than areas that rely more on specialists.1 Over the past several decades, the US medical education system has produced an increasingly specialized physician workforce without any strategic direction toward achieving a socially desirable mix of primary care physicians (PCPs) and specialists.2 At the same time, health care reforms, such as patient-centered medical homes and Accountable Care Organizations (ACOs), rely more on PCPs and other providers who are equipped to coordinate their own care with the care of specialists. Demographic trends signal a growing need for such coordination as the population ages and patients with multiple chronic conditions become more prevalent.3 Despite these trends, physicians in training tend not to select primary care or related specialties.

However, Medicare’s payment system may tend to skew the choices made by doctors when selecting residency programs and entering into medical practice. In 1992, Congress changed the method of reimbursing physicians from a system based on individual physicians’ historical charges to one based on the “relative values” of the thousands of services physicians charge Medicare for. This meant that while fees for existing services have increased very little over the past several years, high payments for new services coupled with substantial increases in the volume of expensive diagnostic and other procedures, have widened the income gap between physician specialties.

We conclude that the mix of physicians in the US has too few PCPs and too many specialists, the income gap between the two is a major determinant of the PCP/specialty mix, and Medicare physician payment policy is a major contributor to the income gap. Changes in GME payments to hospitals to favor training of PCPs have little potential to make a meaningful difference because other incentives affecting physicians in training and teaching hospitals are too powerful. We find that loan forgiveness policies for medical students who pursue careers in primary care appear to be a promising path towards closing the gap and incentivizing more medical students to pursue careers as PCPs. However, no approaches focused on medical education are likely to be successful without revamping the Medicare relative value scale so that it contributes less to the physician income gap.

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.